Long Gamma Position Example:A Case Study in Long Gamma Positions
roddaauthorLong-Gamma Position Example: A Case Study in Long-Gamma Positions
The long-gamma position is a popular trading strategy in the financial market, particularly in derivatives such as options and futures. This strategy involves holding a position for an extended period of time, often months or even years, in order to capitalize on potential price moves in the underlying asset. In this article, we will explore a specific case study of a long-gamma position, highlighting the risks and rewards associated with this strategy.
Background
Long-gamma positions are typically used by investors to manage risk and improve the density of their position in the option chain. By holding a long-gamma position, an investor can increase the potential payout of their position without increasing the risk exposure. This strategy can be particularly useful for investors who want to lock in profits or protect against negative price moves in the underlying asset.
Case Study
Let's take a look at a specific case study of a long-gamma position in the S&P 500 index futures contract (SPX). In this example, an investor decided to purchase a put option on the SPX with a expiration date six months in the future. By doing so, the investor was able to lock in a fixed price for their position, even if the market moved down in price.
At the time of the position, the SPX was trading near its 50-day moving average, suggesting a potential rise in price. The investor believed that the market would continue to rise, and therefore, the put option would expire worthless. If the market did rise, the investor would receive the premium from the sold put option, along with the potential gain in the SPX.
Risks and Rewards
While long-gamma positions can provide valuable risk management tools for investors, they also come with their own set of risks. One of the main risks associated with long-gamma positions is the potential for the option to expire in the money, resulting in a loss for the investor.
In our case study, the SPX continued to rise, but not by enough to expire the put option worthless. The investor, however, was forced to buy back the option at a higher price, resulting in a loss. This loss was offset by the premium received from the sold put option, but the overall result was a smaller profit than expected.
The long-gamma position can be a powerful tool for investors looking to manage risk and capitalize on potential price moves. However, it is essential for investors to understand the risks associated with this strategy and to carefully evaluate their position before entering into a long-gamma position. By doing so, investors can make more informed decisions and maximize their returns in the financial market.